Best of the Week
Most Popular
1.U.S. Housing Bull Market Over? House Prices Trend Forecast Current State - Nadeem_Walayat
2.The Coming U.S. Economic Collapse Will Trigger a Revolution - Harry_Dent
3. Stock Market Crash a Historical Pattern? - Wim_Grommen
4.Global Panic - U.S. Federal Government Stockpiling Ammo – Here’s What We’re Going to Do - Shah Gilani
5.AI, Robotics, and the Future of Jobs - Aaron Smith
6.This is Your Economic Recovery With and Without Drugs - James_Quinn
7.Gold and Silver Price Getting Set To Explode Higher - Austin_Galt
8.The Something for Nothing Society - Lifecycle of Bureaucracy - Ty_Andros
9.Another Interesting Stock Market Juncture - Tony_Caldaro
10.Inflation vs the Deflationary Straw Man - Gary_Tanashian
Last 5 days
The ISIS Menace - Just What We Need, Another War - 27th Aug 14
The Risky Business of Methane-Rich “Fire Ice” - 27th Aug 14
CFR Recommends Policy Shift that is Very Bullish for Gold - 27th Aug 14
Ukraine Standoff Signals Global Power Shift - 27th Aug 14
Stock Market Panic Decline Begins - 27th Aug 14
The Monopoly of the Government Education Cartel - 27th Aug 14
How to Invest in Silver Today for Double-Digit Gains - 27th Aug 14
The Big Solar Energy Breakthrough We've Been Waiting For - 27th Aug 14
U.S. Empire’s Bumpy Ride - 27th Aug 14
Gold Market and the Interest Rate Trap - 27th Aug 14
Stock Market Staring Into the Great Abyss - 27th Aug 14
A Look at the Coming 30-year Inflation Cycle - 27th Aug 14
Forex Trading - Will USD/CHF Rally Above 0.9200? - 27th Aug 14
Europe’s Depressing Economy Dog Days of Summer - 27th Aug 14
How The Coming Silver Price Bubble Will Develop - 26th Aug 14
A Nation of Shopkeepers - Supply-Side (Voodoo) Economics? - 26th Aug 14
Stock Market Bear Tracks Abound In Wall Street - 26th Aug 14
65,000 U.S. Marines Hold up a Mirror to the Economy - 26th Aug 14
Bitcoin Market Provides Clues for Investors - 26th Aug 14
The Key to Trading Success - 26th Aug 14
Will The US Succeed in Breaking Russia to Maintain Dollar Hegemony?... - 26th Aug 14
Even Mainstream Academia Worried about Massive Bubbles in Markets - 26th Aug 14
Iraq and Syria Follow Lebanon's Precedent - 26th Aug 14
Colonization by Bankruptcy: The High-stakes Chess Match for Argentina - 26th Aug 14
Dow Stock Index On The Cusp - 26th Aug 14
Prohibition Laws and Agency Regulations - 26th Aug 14
Will Canadian Regulators be Able to Avoid Final Fatal TSX Venture Exchange (TSX-V) Crash? - 25th Aug 14
HUI Gold Mining Stocks Elliott Wave Projection - 25th Aug 14
Stock Market Uncertainty Resolved With New High - 25th Aug 14
Go Forth Multiply And Replenish The Earth - 25th Aug 14
Dollar Dumping: When Actions Speak Loudest - 25th Aug 14
A Plethora of Currency, Stocks and Precious Metals Chartology - 25th Aug 14
Why Isn’t Fed Monetary Pumping Helping the U.S. Economy? - 25th Aug 14
Myths About Money and Inflation - 25th Aug 14
The Fed Will Raise U.S. Interest Rates in March 2015 - 25th Aug 14
Gold Price Manipulation Still Alive - 25th Aug 14
The Ebola Outbreak: U.S. Sponsored Bioterror? - 24th Aug 14
Instigating War in Europe - Understanding Ukraine in 15 Minutes - 24th Aug 14
LNG Catalysts About to Hand You the investment Opportunity of the Decade - 24th Aug 14
Another Interesting Stock Market Juncture - 24th Aug 14
The West Set Up the ISIS Endgame - 24th Aug 14
Gold And Silver Low Prices Are NOT The Reason To Own Precious Metals - 24th Aug 14
U.S. Housing Bull Market Over? House Prices Trend Forecast Current State - 23rd Aug 14
Inflation vs the Deflationary Straw Man - 23rd Aug 14
U.S. Interest Rate Rise to Occur Mid-2015 According to Fed's Williams - 23rd Aug 14
Bitcoin Price Continuation of a Move up - 23rd Aug 14
Gold and Crude Oil Price on the Verge of Something Big - Hero's Rarely Win - 23rd Aug 14
Oxaloacetate Feeds and GROWS Brain Cells - Alzheimers Cure? - 23rd Aug 14
Gold Rising Interest Rate Fallacy - 22nd Aug 14
Jackson Hole: Myth of the All Powerful Central Banker Continues - 22nd Aug 14
Partying On In The Terror State - Thank God for Nuclear Weapons - 22nd Aug 14
The Something for Nothing Society - Lifecycle of Bureaucracy - 22nd Aug 14
Hitting The ISIS Panic Button In The Middle East - 22nd Aug 14
US Stock Indices 10-Year Consolidation Patterns ... Upside Breakouts? - 22nd Aug 14
Gold and Silver Price Getting Set To Explode Higher - 22nd Aug 14
Deflation's Final Curtain Call - Part II - 22nd Aug 14 - Clif_Droke
Gold Big Picture: Most Important - 22nd Aug 14
How the “Uncertainty Factor” Drives Crude Oil Prices - 22nd Aug 14
Inflation, Interest Rates, and Why You Should Own Gold - 22nd Aug 14
U.S. Interest Rates Can Rise States Fed President - 22nd Aug 14
Why Emotional Discipline is Key to Trading Success - 21st Aug 14
Getting the Most Value from Your “Geriatric Cruiser” - 21st Aug 14
Mafia Boss Claims Stocks A Bubble, Buy Physical Gold and Silver - 21st Aug 14
Outrage! On The Beheading of Our Media Brother James Foley - 21st Aug 14
Stock Market Crash a Historical Pattern? - 21st Aug 14
The Black Box Economy - 21st Aug 14
The Bond Market is taking Advantage of Janet Yellen`s Dovishness - 21st Aug 14
Meet Your Investment Manager - 21st Aug 14
Gold and Silver Trading Alert as U.S. Dollar Soars to New Highs - 21st Aug 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Biggest lie in Stock Market History Revealed

It's Time to Brace for a Repeat of Financial Crisis 2008, Recession 2012

Stock-Markets / Credit Crisis 2012 Dec 13, 2011 - 07:51 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleMartin Hutchinson writes: If you think the global economy is out of the woods now that the European Union (EU) has expanded its effort to solve the sovereign debt crisis, then I'm afraid you're sorely mistaken.

No doubt, the European crisis is far from being solved - but that's hardly the only potential economic catastrophe looming on the horizon.


Indeed, two successive articles in the Financial Times last week warned of a new disaster approaching: They forecast 25% declines in financing volume for both commodities finance and aircraft purchases in 2012.

Now that would be truly bad news.

You see, the most job-destroying feature of the 2008-09 recession was a 17% decline in world trade that was caused by the financial crash and the disruption to the world's banks. That decline intensified recessionary conditions and caused millions of job losses worldwide. Some 700,000 jobs were being lost each month in the United States alone for a period in early 2009. That's more than double the previous worst monthly losses since World War II.

And now we could be in for a repeat.

In fact, it's hard to see how one can be avoided.

In today's distorted world financial system, a combination of over-loose monetary policy, intractable budget deficits, and tightening regulation seems to have made a credit crunch more or less inevitable.

So if you're smart, you'll take a moment to examine exactly why, and then figure out who the winners and losers are going to be.

Here's how.

A Disruptive Disconnect
When you look at bank lending, it's clear that the link between the huge amount of world money growth and the meager supply of lending to productive enterprise is broken.

U.S. Federal Reserve Chairman Ben S. Bernanke and his international colleagues can hand as much money as they like out to banks, but if the banks don't lend it, that money will be wasted. And right now the banks aren't lending to trade and private businesses for three reasons: •The Yield Curve: Central bankers have kept short-term interest rates far below the level of long-term rates and have made it clear that they will intervene if long-term rates rise. Banks can borrow short-term, lend in the long-term markets, and through this "gapping" use massive leverage to boost their returns.

•Regulatory Loopholes: Basel Committee banking regulations currently allow banks to escape allocating capital to their holdings of Organization of Economic Cooperation and Development (OECD) government debt. These regulations allow banks to play the gapping/leverage game without limit, provided they invest in government or government-guaranteed bonds. This has financed the gigantic budget deficits of recent years. However, it has also "crowded out" private sector lending.
•Limitations On Capital: Banks have ample liquidity, but they have only a finite store of capital. Accordingly, if regulators force banks to hold more capital, their loan volume will be limited and they will no longer be able to expand lending (other than to governments). Currently, banks can only raise more capital at below their net asset value, diluting their existing shareholders.

Even the "shadow" banking sector - the brokerages, money market funds, hedge funds and structured investment vehicles that provided massive lending volumes before 2008 - cannot help much now.

Structured investment vehicles are, for obvious reasons, a lot less popular than they were before 2008. Hedge funds were until this year even more popular than before 2008, but their suddenly cautious bankers don't let them leverage themselves like they used to. Money market funds have shrunk because their returns have been pathetic for the last three years. Meanwhile, inflation has risen, eroding the real value of their investors' capital.

So the shadow banking system won't be able to make up for lending cutbacks in the banks.

Indeed, the string on which the Fed is pushing is completely slack, and another $1 trillion of Fed monetary stimulus won't lead to even an extra dollar of productive loans.

The solution?

Interest rates need to rise. That will increase the supply of savings, reduce the ability of banks to make money through gapping/leverage games, and restore the linkage between massive systemic liquidity and sluggish productive lending.

Of course, while Ben Bernanke and other current central bankers are in charge, higher interest rates are off the table - regardless of how beneficial they might be.

Now here's what that means for 2012.

Preparing for the 2012 Recession
With interest rates so low and banks so restricted, the chance of a true credit crunch is quite high.

That means countries with large budget deficits - notably Britain, Japan, and the United States - could suddenly see interest rates rise and funding dry up abruptly.

Emerging markets would be divided into those with ample domestic savings or currency reserves - China, Taiwan, Singapore and Chile, for example - and those with bloated public sectors and extravagant consumers - the majority of Latin America, Brazil and India.

Liquid emerging markets would do fine, but illiquid emerging markets would suffer badly - think Latin America in the 1980s and Asia after 1997.

In the private sector, businesses such as aircraft financing and commercial real estate that are chunky and not especially people-intensive could find funding through the shadow banking system, albeit at higher rates than they are used to. However, small businesses and trade finance would find funding much harder to come by.

The existence of vast pools of liquidity would support commodity prices, unless the world suffered a major economic downturn. And gold and silver, which are safe havens in times of crisis that do not depend on a smoothly functioning banking system for their support, would probably do quite well.

Some trade financing might be carried out in gold, with sellers happy to carry buyers' credit risks on their balance sheets provided they could be repaid in an inflation proof asset with no linkage to troubled financial systems.

The bottom line is that in spite of, or to some extent because of, the efforts of Bernanke and his cronies, a credit crunch and another massive drop in world trade volumes is quite likely in 2012.

Only a modest money market shock would set one off, and with Europe tottering such a shock seems very likely indeed. We should be prepared.

To safeguard against any trouble, you might consider the iShares MSCI Singapore Index ETF (NYSE: EWS), the iShares MSCI Taiwan Index ETF (NYSE: EWT), and the Aberdeen Chile Fund (NYSE: CH), which I recently recommended in my 2012 emerging markets outlook.

It'd also be a good idea to add to your precious metals holdings through the SPDR Gold Trust ETF (NYSE: GLD). Don't hedge this risk through gold alone, however. If the 2008 crunch repeated exactly, its price would fall rather than rise.

Source :http://moneymorning.com/2011/12/13/its-time-to-brace-for-a-repeat-of-2008/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014